F.A.Q. on Income from House Property
Q1. How is income to be computed, if a property is partly let out and partly self-occupied?Answer. It has to be treated as two residential units and income from each unit has to be computed according to law by allocating common outgoings on a basis proportionate to area of occupation.
Q2. Is it necessary that the person must be a legal owner in order that the income should be computed under the head “income from property”?Answer. No. If a person is entitled to the income under the law, such income is bound to be assessed under the head “income from property”. Tax laws are generally concerned with beneficial ownership as laid down in CIT vs. Podar Cement Pvt. Ltd.
Q.3. Is municipal tax deductible in computation of income from: (i) self-occupied property; and (ii) where demand notice is reserved but it has not been paid?Answer. Since income from one self-occupied property is nil, subject only to deduction of interest the question of deduction of municipal tax does not arise. For let out proper-ties, municipal tax is deductible only if it is paid during the year.
Q.4. Is deduction for repairs available, when tenant undertakes repairs under the rental agreement? What is meant by repairs?Answer. By repairs we mean only substantial repairs as held in CIT vs. Parbutty Churn Law 1965 57 ITR 609 Cal and Sir Shadi Lai & Sons vs. CIT. Where even substantial repairs other than normal maintenance is undertaken by tenant, annual value should get enhanced by the extent of repairs which should have been borne by the landlord so that any deduction for repairs then available to landlord will neutralise the amount added to annual rent. It would, therefore, mean that where there is specific stipulation that all repairs will be borne by tenant, there can be no deduction for repairs.
Q5. Is an annual charge on rent receivable on account of mortgage of property for obtaining funds for business or paying income tax deductible under section 24(1)(iv) of the Income Tax Act, 1961 ?Answer. No. Since it is a charge created voluntarily by the assessee, it is not deductible as was held in CIT vs. Indramani Devi Singhania in case of a business loan and CIT vs. Tarachand Kalyanji in the case of a charge created for payment of excess profit tax In the latter case, it was held that the amount is not deductible even if the charge has been created before 1st April, 1969, when such amount was deductible in law.
Q6. What are the conditions for deduction of unrealised rent?Answer. Rule 4 of the Income-tax Rules as substituted by the Income-tax (Eighth Amendment) Rules, 2001 prescribes the conditions as under:
Unrealised rent—For the purposes of the Explanation below sub-section (1) of section 23, the amount of rent which the owner cannot realise shall be equal to the amount of rent payable but not paid by a tenant of the assessee and so proved to be lost and irrecoverable where,—
(a) the tenancy is bona fide;
(b) the defaulting tenant has vacated, or steps have been taken to compel him to vacate the property;
(c) the defaulting tenant is not in occupation of any other property of the assessee;
(d) the assessee has taken all reasonable steps to institute legal proceedings for the recovery of the unpaid rent or satisfies the Assessing Officer that legal proceedings would be useless.
Q7. Is salary paid to a caretaker deductible?Answer. No. Only deductions specified under section 24 are deductible.
Q8. How is the income of co-owned property computed?Answer. Income has to be split up between co-owners and each co-owner has to be assessed as his share of the income as provided under section 26 of the Act.
Q9. Where an assessee borrows a second loan for repaying the first loan taken for acquiring a property, will the interest on second loan be deductible as amount borrowed for acquiring the property?Answer. Yes. It is so conceded in Board’s Circular No. 28 dated 20th August, 1969.
Q10. Ground rent—whether arrears of earlier years deductible?Answer. No. The deduction under section 24(1 )(v) is confined to the ground rent of previous year, and thus arrears of earlier years are not deductible. Ground rent is no longer deductible from A.Y.2002-2003.
Q11. Interest deductible under section 24(1 )(vi): whether simple interest or compound Interest?Answer. Only simple interest is deductible.
Q12. What is the treatment given to loss from property?Answer. Loss from property can be set off against other heads of income in the same year and to the extent unabsorbed, it will be carried forward and set off in next eight years.
Q13. Where municipal valuation is higher than the rent charged, what is the basis of computation of property income?Answer. The law requires that either annual value as fixed by the local authorities or actual rent received, whichever is higher, should be treated as annual value. But where the assessee is unable to enhance the rent due to Rent Control Act, there is a case for acceptance of rent receivable as the basis. It was so held in CIT vs. Sampathammal Chordia 2000 245 ITR 290 Mad.
Q14. Are municipal taxes allowed on the basis of tax leviable for a year or on the basis of payment? If it is on the basis of what is leviable, what happens if demand for earlier years is received only during the year with the result that the payments for earlier years are made during the year?Answer. Section 23(1) allows property tax levied by local authority on the basis of payment from assessment year 1985-86 vide amendment by Taxation Laws (Amendment) Act, 1984 so that the controversy in the prior law is now avoided. So, the amount paid during the year, including any amount of arrears for earlier years, is deductible in the year of payment.
Q15. Where the assessee is a mutual association having a property, will the property income be covered by the principle of mutuality so as to be exempt?Answer. Yes, it has been held that principle of mutuality applies even to income from house property in Chelmsford Club vs. CIT (2000) 243 ITR 89 (SC).
Q16. The assessee — Mrs. A is in enjoyment of the property but the right is limited only for life under a Will in her favour. Who has to pay the tax, whether she as the person in enjoyment of the property as the holder of life interest or the remainderman treated as the owner in law?Answer. Ownership is a bundle of rights. Right to enjoy the property is also a right which is part of such ownership right. Hence it will be assessable in the hands of life interest owner. It has been so held in Estate of Ambalal Sarabhai vs. CIT 2000 245 ITR 445 Guj.
Q17. Where an assessee receives interest on deposit taken from a tenant, is it necessary to enhance the annual value by the notional interest which would have otherwise been payable?Answer. Where actual rent received is more than the fair rent, i.e., annual value fixed by the local authorities, notional interest need not be added. It was so held in CIT vs. J.K. Investors (Bombay) Ltd. 2001) 167 CTR (Mad) 163. Where such notional interest is to be taken, as for example, where no rent is charged because of such interest free deposit, the interest or other income earned by deployment of the interest free deposit will have to be correspondingly reduced from the annual value but the law does not provide for the same.
But it stands to reason that such reduction may have to be allowed, though it is doubtful whether such reasonable interpretation will be acceptable to revenue.
Q18. Is it open to the Assessing Officer to substitute reasonable rent where the property is let out to an associate company at a lower rate?Answer. Since annual value is not the only criterion, it is open to the Assessing Officer to adopt a reasonable rate where it is let out at a concessional rate. It was so held in T. V. Sundaram Iyengar & Sons Ltd. vs. CIT.
Q19. Where the property is in existence for less than 12 months, is it possible to assess the income as income from property since the scheme of the Act is to assess the annual rent? Does the income escape assessment in such cases?Answer. The argument that the property should have been held for entire 12 months to be assessable under the head ‘Income from property’ was accepted in P.J. Eapen vs. CIT. But it was held that such income will be assessable under ‘Other sources’. The decision is open to doubt because there is no reason why the proportionate income should not be assessed with reference to the period of holding because such proportionality is recognised in section 23 where the property is let out for part of the year and used for own residence for rest of the year under section 23(2)(a)(ii). Hence, similar apportionment should be possible though the annual value is with reference to the income which the property might fetch if let out from year to year.
Q20. Where the deduction under section 24 exceeds the available income, can such excess be allowable?Answer. Where the property is partly let out and partly used for own residence, the deduction under section 24(1) will be limited to the income determined under that clause under the substituted section 24 by Finance Act, 2001. with effect from 1.4.2002, there are no detailed deductions but only 30% of annual value and interest on borrowed capital subject to the limit of ` 30,000 for self-occupied property with enhanced limit up to `2.00 lakhs subject to conditions as to the date of the loan and the date of construction. Hence, there can be a loss from the property depending upon interest on borrowed capital. It is only in respect of annual value, that there cannot be loss.
Q21. There is a practice of receiving deposit instead of rent. The assessee accounts for interest on such deposits as its income. Should he also account for notional income from property?Answer. The answer was against the assessee in S.Ujjanappa vs. CIT, where it was held that ownership confers the duty to account for notional income from such property. The issue as to whether it involves double taxation was not posed in this case. Interest income earned by the assessee on the deposits or notional interest when used in business could have been set off against such income. There is clearly double taxation implicit in such cases. In Webb’s Agricultural & Automobile Industries vs. ITO , a car received by way of lottery winnings brought to tax as income was held to be eligible for depreciation, though assessee had not paid for the same, because of the notional cost. This line of reasoning should avoid elimination of double taxation by setting off the two incomes one notional and the other real as between them, but the law on the subject is still nebulous.
Q22. Is the amount of interest paid on unpaid consideration for acquiring property deductible as interest on borrowing under section 24(1 )(vi) of the Income-tax Act?Answer. In the context of similar interest on unpaid consideration for acquiring a business; the Supreme Court had held in Bombay Steam Navigation Co. (1953) P. Ltd. vs. CIT that such interest is not deductible under section 36(1)(iii) of the Income-tax Act, 1961. But in the same case, it was found that it can be allowed as deduction under section 37 of the Act. It is for this reason that it has felt that in absence of similar residuary clause, interest on unpaid consideration for acquiring property would not be deductible.
However it was found in CIT vs. Sunil Kumar Sharma following CIT vs. R.P. Goenka and J.P. Goenka that it makes no difference, whether the buyer borrows from a third party to acquire a property or gets the necessary financial assistance from the seller of the property. It should be construed that the seller is the lender and the purchaser is the borrower. It would thus appear that such interest is deductible.
Q23. What is the change in respect of computation of property income by the Finance Act, 2005?Answer. There is no change in computation of property income, but the incentive for re-payment of loan for acquiring a property is enlarged by removing the limit of Rs. 20,000 in respect of such repayment and by providing such repayment as an outright deduction from the gross total income by the new section 80C substituting section 88, subject, however, to the limit of total deduction under section 80C to Rs. 1.50 lakh. Interest payable on such loan would be admissible as deduction, if the property were let out, subject to limit of Rs. 30,000 in case of self- occupation.
Q24. If a person puts up a property on leased land, is the lease rent deductible as income from property?Answer. There is no special provision for deduction of lease rent as was available in the pre-existing law under section 24 either as an annual charge on the property or as ground rent, but all the same, what is payable on leased land gets diverted at source and should not be part of the annual value, so that in determination of annual value, the amount should be deductible. Any other view could not be reasonable. An alternative argument may well be that if it is not deductible, income itself may not be assessable as a property income as the assessee is not the full owner of the property, so that income will be assessable as from “Other sources”, so that the deduction in such a case cannot be denied, though the assessee may not be eligible for an ad hoc deduction at 30%; but only actual repairs, where it is assessable as income from other sources.
Q25. Where a landlord undertakes to meet the expenses of watch and ward, corridor, lighting, lift, etc., are such expenses deductible from property income?
Answer. Expenses which are ordinarily borne by the tenant, but undertaken by the landlord according to terms of rental agreement will go to reduce the annual value, because the rental value of the property can only be the net income after meeting the tenant’s burden.
Q26. Where the assessee allows the property to be used by firm of which he is a partner without charging rent, is he entitled to self-occupation allowance or depreciation?Answer. Since the firm is not a separate legal entity, the use of property by the firm should be treated as use and occupation of the property by the partner itself, so that self-occupation benefit will be available from income from such property. If the property is used for business, there is eligibility for depreciation also.
Q27. Where a partner allows the use of the property by the firm and charges rent for the same, would he be entitled to ad hoc deduction at 30% or depreciation of the property because of the use for business?Answer. Since the rent is received from a firm of which he is a partner, the amount of rent receivable may not be treated as received in his capacity as landlord, but as a partner. If the property is used for business, the owner should be entitled to depreciation. It was so held in CIT vs. Ramlubhaiya R. Malhotra following A.M. Ponnuranga Mudaliar vs. CIT. The latter decision was followed in CIT vs. Texspin Engineering and Manufacturing Works.
Q28. In the case where a tenant sublets the property, is the rent paid by the tenant deductible from the income from subletting?Answer. Since the tenant is not the owner, the income should ordinarily be assessable as income from other sources, so that the rent paid should be deductible. Even if it were lease- hold property, the rent paid may have to be taken into account in determining the annual value. Contrary view taken in CIT Hemraj Mahabir Prasad Ltd. would need review.
Q.29. Where the assessee borrows money on mortgage of his property for his daughter’s marriage, is such interest paid deductible from the property income?
Answer. Merely because the loan is charged on the property, interest does not become deductible, because the amount is not borrowed for purpose of acquiring or constructing the property.
Source Online ArticleQ2. Is it necessary that the person must be a legal owner in order that the income should be computed under the head “income from property”?Answer. No. If a person is entitled to the income under the law, such income is bound to be assessed under the head “income from property”. Tax laws are generally concerned with beneficial ownership as laid down in CIT vs. Podar Cement Pvt. Ltd.
Q.3. Is municipal tax deductible in computation of income from: (i) self-occupied property; and (ii) where demand notice is reserved but it has not been paid?Answer. Since income from one self-occupied property is nil, subject only to deduction of interest the question of deduction of municipal tax does not arise. For let out proper-ties, municipal tax is deductible only if it is paid during the year.
Q.4. Is deduction for repairs available, when tenant undertakes repairs under the rental agreement? What is meant by repairs?Answer. By repairs we mean only substantial repairs as held in CIT vs. Parbutty Churn Law 1965 57 ITR 609 Cal and Sir Shadi Lai & Sons vs. CIT. Where even substantial repairs other than normal maintenance is undertaken by tenant, annual value should get enhanced by the extent of repairs which should have been borne by the landlord so that any deduction for repairs then available to landlord will neutralise the amount added to annual rent. It would, therefore, mean that where there is specific stipulation that all repairs will be borne by tenant, there can be no deduction for repairs.
Q5. Is an annual charge on rent receivable on account of mortgage of property for obtaining funds for business or paying income tax deductible under section 24(1)(iv) of the Income Tax Act, 1961 ?Answer. No. Since it is a charge created voluntarily by the assessee, it is not deductible as was held in CIT vs. Indramani Devi Singhania in case of a business loan and CIT vs. Tarachand Kalyanji in the case of a charge created for payment of excess profit tax In the latter case, it was held that the amount is not deductible even if the charge has been created before 1st April, 1969, when such amount was deductible in law.
Q6. What are the conditions for deduction of unrealised rent?Answer. Rule 4 of the Income-tax Rules as substituted by the Income-tax (Eighth Amendment) Rules, 2001 prescribes the conditions as under:
Unrealised rent—For the purposes of the Explanation below sub-section (1) of section 23, the amount of rent which the owner cannot realise shall be equal to the amount of rent payable but not paid by a tenant of the assessee and so proved to be lost and irrecoverable where,—
(a) the tenancy is bona fide;
(b) the defaulting tenant has vacated, or steps have been taken to compel him to vacate the property;
(c) the defaulting tenant is not in occupation of any other property of the assessee;
(d) the assessee has taken all reasonable steps to institute legal proceedings for the recovery of the unpaid rent or satisfies the Assessing Officer that legal proceedings would be useless.
Q7. Is salary paid to a caretaker deductible?Answer. No. Only deductions specified under section 24 are deductible.
Q8. How is the income of co-owned property computed?Answer. Income has to be split up between co-owners and each co-owner has to be assessed as his share of the income as provided under section 26 of the Act.
Q9. Where an assessee borrows a second loan for repaying the first loan taken for acquiring a property, will the interest on second loan be deductible as amount borrowed for acquiring the property?Answer. Yes. It is so conceded in Board’s Circular No. 28 dated 20th August, 1969.
Q10. Ground rent—whether arrears of earlier years deductible?Answer. No. The deduction under section 24(1 )(v) is confined to the ground rent of previous year, and thus arrears of earlier years are not deductible. Ground rent is no longer deductible from A.Y.2002-2003.
Q11. Interest deductible under section 24(1 )(vi): whether simple interest or compound Interest?Answer. Only simple interest is deductible.
Q12. What is the treatment given to loss from property?Answer. Loss from property can be set off against other heads of income in the same year and to the extent unabsorbed, it will be carried forward and set off in next eight years.
Q13. Where municipal valuation is higher than the rent charged, what is the basis of computation of property income?Answer. The law requires that either annual value as fixed by the local authorities or actual rent received, whichever is higher, should be treated as annual value. But where the assessee is unable to enhance the rent due to Rent Control Act, there is a case for acceptance of rent receivable as the basis. It was so held in CIT vs. Sampathammal Chordia 2000 245 ITR 290 Mad.
Q14. Are municipal taxes allowed on the basis of tax leviable for a year or on the basis of payment? If it is on the basis of what is leviable, what happens if demand for earlier years is received only during the year with the result that the payments for earlier years are made during the year?Answer. Section 23(1) allows property tax levied by local authority on the basis of payment from assessment year 1985-86 vide amendment by Taxation Laws (Amendment) Act, 1984 so that the controversy in the prior law is now avoided. So, the amount paid during the year, including any amount of arrears for earlier years, is deductible in the year of payment.
Q15. Where the assessee is a mutual association having a property, will the property income be covered by the principle of mutuality so as to be exempt?Answer. Yes, it has been held that principle of mutuality applies even to income from house property in Chelmsford Club vs. CIT (2000) 243 ITR 89 (SC).
Q16. The assessee — Mrs. A is in enjoyment of the property but the right is limited only for life under a Will in her favour. Who has to pay the tax, whether she as the person in enjoyment of the property as the holder of life interest or the remainderman treated as the owner in law?Answer. Ownership is a bundle of rights. Right to enjoy the property is also a right which is part of such ownership right. Hence it will be assessable in the hands of life interest owner. It has been so held in Estate of Ambalal Sarabhai vs. CIT 2000 245 ITR 445 Guj.
Q17. Where an assessee receives interest on deposit taken from a tenant, is it necessary to enhance the annual value by the notional interest which would have otherwise been payable?Answer. Where actual rent received is more than the fair rent, i.e., annual value fixed by the local authorities, notional interest need not be added. It was so held in CIT vs. J.K. Investors (Bombay) Ltd. 2001) 167 CTR (Mad) 163. Where such notional interest is to be taken, as for example, where no rent is charged because of such interest free deposit, the interest or other income earned by deployment of the interest free deposit will have to be correspondingly reduced from the annual value but the law does not provide for the same.
But it stands to reason that such reduction may have to be allowed, though it is doubtful whether such reasonable interpretation will be acceptable to revenue.
Q18. Is it open to the Assessing Officer to substitute reasonable rent where the property is let out to an associate company at a lower rate?Answer. Since annual value is not the only criterion, it is open to the Assessing Officer to adopt a reasonable rate where it is let out at a concessional rate. It was so held in T. V. Sundaram Iyengar & Sons Ltd. vs. CIT.
Q19. Where the property is in existence for less than 12 months, is it possible to assess the income as income from property since the scheme of the Act is to assess the annual rent? Does the income escape assessment in such cases?Answer. The argument that the property should have been held for entire 12 months to be assessable under the head ‘Income from property’ was accepted in P.J. Eapen vs. CIT. But it was held that such income will be assessable under ‘Other sources’. The decision is open to doubt because there is no reason why the proportionate income should not be assessed with reference to the period of holding because such proportionality is recognised in section 23 where the property is let out for part of the year and used for own residence for rest of the year under section 23(2)(a)(ii). Hence, similar apportionment should be possible though the annual value is with reference to the income which the property might fetch if let out from year to year.
Q20. Where the deduction under section 24 exceeds the available income, can such excess be allowable?Answer. Where the property is partly let out and partly used for own residence, the deduction under section 24(1) will be limited to the income determined under that clause under the substituted section 24 by Finance Act, 2001. with effect from 1.4.2002, there are no detailed deductions but only 30% of annual value and interest on borrowed capital subject to the limit of ` 30,000 for self-occupied property with enhanced limit up to `2.00 lakhs subject to conditions as to the date of the loan and the date of construction. Hence, there can be a loss from the property depending upon interest on borrowed capital. It is only in respect of annual value, that there cannot be loss.
Q21. There is a practice of receiving deposit instead of rent. The assessee accounts for interest on such deposits as its income. Should he also account for notional income from property?Answer. The answer was against the assessee in S.Ujjanappa vs. CIT, where it was held that ownership confers the duty to account for notional income from such property. The issue as to whether it involves double taxation was not posed in this case. Interest income earned by the assessee on the deposits or notional interest when used in business could have been set off against such income. There is clearly double taxation implicit in such cases. In Webb’s Agricultural & Automobile Industries vs. ITO , a car received by way of lottery winnings brought to tax as income was held to be eligible for depreciation, though assessee had not paid for the same, because of the notional cost. This line of reasoning should avoid elimination of double taxation by setting off the two incomes one notional and the other real as between them, but the law on the subject is still nebulous.
Q22. Is the amount of interest paid on unpaid consideration for acquiring property deductible as interest on borrowing under section 24(1 )(vi) of the Income-tax Act?Answer. In the context of similar interest on unpaid consideration for acquiring a business; the Supreme Court had held in Bombay Steam Navigation Co. (1953) P. Ltd. vs. CIT that such interest is not deductible under section 36(1)(iii) of the Income-tax Act, 1961. But in the same case, it was found that it can be allowed as deduction under section 37 of the Act. It is for this reason that it has felt that in absence of similar residuary clause, interest on unpaid consideration for acquiring property would not be deductible.
However it was found in CIT vs. Sunil Kumar Sharma following CIT vs. R.P. Goenka and J.P. Goenka that it makes no difference, whether the buyer borrows from a third party to acquire a property or gets the necessary financial assistance from the seller of the property. It should be construed that the seller is the lender and the purchaser is the borrower. It would thus appear that such interest is deductible.
Q23. What is the change in respect of computation of property income by the Finance Act, 2005?Answer. There is no change in computation of property income, but the incentive for re-payment of loan for acquiring a property is enlarged by removing the limit of Rs. 20,000 in respect of such repayment and by providing such repayment as an outright deduction from the gross total income by the new section 80C substituting section 88, subject, however, to the limit of total deduction under section 80C to Rs. 1.50 lakh. Interest payable on such loan would be admissible as deduction, if the property were let out, subject to limit of Rs. 30,000 in case of self- occupation.
Q24. If a person puts up a property on leased land, is the lease rent deductible as income from property?Answer. There is no special provision for deduction of lease rent as was available in the pre-existing law under section 24 either as an annual charge on the property or as ground rent, but all the same, what is payable on leased land gets diverted at source and should not be part of the annual value, so that in determination of annual value, the amount should be deductible. Any other view could not be reasonable. An alternative argument may well be that if it is not deductible, income itself may not be assessable as a property income as the assessee is not the full owner of the property, so that income will be assessable as from “Other sources”, so that the deduction in such a case cannot be denied, though the assessee may not be eligible for an ad hoc deduction at 30%; but only actual repairs, where it is assessable as income from other sources.
Q25. Where a landlord undertakes to meet the expenses of watch and ward, corridor, lighting, lift, etc., are such expenses deductible from property income?
Answer. Expenses which are ordinarily borne by the tenant, but undertaken by the landlord according to terms of rental agreement will go to reduce the annual value, because the rental value of the property can only be the net income after meeting the tenant’s burden.
Q26. Where the assessee allows the property to be used by firm of which he is a partner without charging rent, is he entitled to self-occupation allowance or depreciation?Answer. Since the firm is not a separate legal entity, the use of property by the firm should be treated as use and occupation of the property by the partner itself, so that self-occupation benefit will be available from income from such property. If the property is used for business, there is eligibility for depreciation also.
Q27. Where a partner allows the use of the property by the firm and charges rent for the same, would he be entitled to ad hoc deduction at 30% or depreciation of the property because of the use for business?Answer. Since the rent is received from a firm of which he is a partner, the amount of rent receivable may not be treated as received in his capacity as landlord, but as a partner. If the property is used for business, the owner should be entitled to depreciation. It was so held in CIT vs. Ramlubhaiya R. Malhotra following A.M. Ponnuranga Mudaliar vs. CIT. The latter decision was followed in CIT vs. Texspin Engineering and Manufacturing Works.
Q28. In the case where a tenant sublets the property, is the rent paid by the tenant deductible from the income from subletting?Answer. Since the tenant is not the owner, the income should ordinarily be assessable as income from other sources, so that the rent paid should be deductible. Even if it were lease- hold property, the rent paid may have to be taken into account in determining the annual value. Contrary view taken in CIT Hemraj Mahabir Prasad Ltd. would need review.
Q.29. Where the assessee borrows money on mortgage of his property for his daughter’s marriage, is such interest paid deductible from the property income?
Answer. Merely because the loan is charged on the property, interest does not become deductible, because the amount is not borrowed for purpose of acquiring or constructing the property.
